It was twenty years ago today...
on October 19th 2007 that US Equity markets had their biggest one day movement ever. Following up on an overnight 5% correction which jolted Hong Kong, a sharp, 10% sell off that hit London, the Dow collapsed 508 points
, or over 22% in one day. The value of US Equities decreased by over one trillion dollars during the last of four days of relentless selling.
Several weeks later, Nicholas Brady was appointed by then US President Ronald Reagan to lead a commission
investigating this event. Their conclusion was simple: stock valuations were not at fault, rather the existing infrastructure wasn’t equipped to handle a huge surge in trading volume.
Three of the commissions recommendations ( "Brady Report", 1988, Presidential Task Force on Market Mechanisms): improved settlement and clearance procedures, increasing capacity at the exchanges and, somewhat controversially, “market circuit breakers” which slow then ultimately stop trading should equity prices first tumble, then sharply move down in value (I say “controversially”, as nobody complains if a share gains 100% in one day, now do they?)
Andrew Lo, author of "A Non-random Walk Down Wall Street"
(Princeton University Press, 1999) stated in today's FT "We now have a much better integrated and connected set of financial markets. Disruption in one can very easily spill over"
What's your view? Do you think another US Equity market collapse would, for example, drive a flight to safety in US Treasuries? Or would massive losses in the stock market cause bond yields to skyrocket
? What would the impact of such a huge equity market loss be on single stock futures
, which weren’t tradable products in 1987 but were available – and widely blamed
– for the 1929 crash? While those on the correct side of a tumbling futures contract would welcome variation margin, would the equity and futures markets disconnect? Would we first see ripples, then a violent tsunami like wave of selling engulfing all markets?
Curiously, significant international news of that time also was US / Iran saber rattling